Despite a slight decline in sales, naval shipbuilder Huntington Ingalls Industries [HII] yesterday posted strong income gains, driven by operating performance at its Ingalls and Newport News divisions.
The second quarter results were similar to those of the first quarter, when earnings soared despite flat sales as the company focuses on execution. However, the third quarter may be more challenging due to an unusual setback during pier side trials of the LPD-25 Somerset amphibious transport dock ship on the Mississippi River when debris became entangled in one of the propellers while they were running, forcing HII to undertake repairs in drydock.
The estimated charges that could result from the repairs are between $2 million and $15 million, Barb Niland, HII’s chief financial officer, said on yesterday’s earnings call. Ultimately, she doesn’t expect the charge to be at the high end of the estimate, adding that the company is working to minimize the impact on cost and schedule.
Mike Petters, HII’s president and CEO, said the drydock only lasted nine days instead of the expected three to four weeks, and the company still plans on conducting builder’s trials in the third quarter with delivery of LPD-25 to the Navy in the fourth quarter. He said that builder’s and acceptance trials for the LHA-6 USS America amphibious assault ship will also be done this year followed by delivery in early 2014.
Net income in the quarter increased 14 percent to $57 million, $1.12 earnings per share (EPS), from $50 million ($1.00 EPS) a year ago, sailing past consensus estimates of 93 cents EPS. Operating performance was highlighted by a 70 basis point improvement in segment operating margins to 8.1 percent.
The company attributed the higher income to risk retirement on the Navy’s Virginia-class submarine and Coast Guard National Security Cutter (NSC) programs, which was partially offset by lower volumes on amphibious assault ship programs and a $7 million gain last year for a contract dispute resolution.
Sales dipped 2 percent to just under $1.7 billion from just over $1.7 billion as higher sales in fleet support services, aircraft carriers, submarines, surface combatants and the NSC program were more than offset by declines in amphibious assault ships and lower volumes on an aircraft carrier refueling and overhaul and construction of the CVN-78 Gerald R. Ford carrier.
Orders in the quarter were $5.3 billion and backlog at the end of June stood at a healthy $20.7 billion, of which $13.7 billion was funded. Free cash flow was neutral. Backlog a year ago stood at $16.2 billion. Petters said the company is working to secure a Navy contract this year on the Block IV buy of Virginia-class submarines, which would further bolster the backlog.
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| Composite deckhouse for DDG 1001. Photo by HII |
HII also repurchased $25 million of its stock in the quarter, although that didn’t stop its share count from rising.
Petters said that HII continues to explore ways to keep its Avondale shipyard open. In addition to sizing up partners and market opportunities in the energy infrastructure market, the company is now looking at the potential for building commercial vessels, an opportunity being driven by demand to support Jones Act requirements, Petters said. The act provides a market for United States shipyards to build vessels for owners and operators of U.S. flagged vessels.
With an eye on its past difficulties entering the commercial shipbuilding market, Petters said the company won’t venture in this direction without the right pricing structure and risk profile as well as its four pillars it has stuck by related to shifting manufacturing at Avondale away from Navy ships. These are support from the State of Louisiana, the Navy, a creditable partner and a viable market, he said.
Petters also said that following the Navy’s award last week to General Dynamics [GD] of a contract to build a steel deckhouse on the third DDG-1000 destroyer, HII is evaluating the future of its Gulfport, Miss., composites center of excellence, which is providing deckhouses for the first two DDG-1000s and certain composite structures for other vessels.
Current work at the composites facility, which employs 650 workers, is slated to be complete in the first quarter of 2014.